Is It Something in the Water at The New York Times? It Makes Economic Sense … Again

Published August 3, 2015

Quite remarkably, for the second time in a weekThe New York Times has shown some economic sense.

Let me repeat that, with some emphasis added: For the second time in a weekThe New York Times has shown some economic sense. That it comes in a column by Paul Krugman, quite possibly the silliest person ever to win a Nobel Prize in economics [1], makes it all the more notable.

In a column explaining why Puerto Rico’s dire financial position is distinguishable from that of Greece, Krugman on Monday, commented that a recent report commissioned by Puerto Rico’s government “could be right” about two basic things that should be known to anyone with even the most basic understanding of economics:

One, that Puerto Rico’s economy is hurt by sharing the same minimum wage with the United States, of which Puerto Rico is merely a territory and a commonwealth, not a state.

Second, that the Puerto Rican economy is hurt by “federal benefits that encourage adults to drop out of the workforce.”

To emphasize both the importance of, and the limits on, this admission, the Sveriges Riksbank Prize-winning economist Mr. Krugman observed only that “[i]n principle these complaints could be right.”

“In particular,” he continued, “even economists who support a higher U.S. minimum wage, myself included, generally agree that it could be a problem if set too high relative to productivity – and Puerto Rican productivity is far below mainland levels.”

Not having won the Sveriges Riksbank Prize myself, I shan’t wander into the thickets of whether, how, or why Puerto Rican productivity may be below mainland levels, but I’m pretty sure Mr. Krugman is on to something when he recognizes the fact that “federal benefits that encourage adults to drop out of the workforce” might have something to do with it.

And that takes us back to the first and irrefutable point, which should be obvious to Sveriges Riksbank Prize-winners and non-winners alike: that having a minimum wage “set too high relative to” – that is, not supported by – productivity will always be a problem.

As we suggested in this space last week, setting a minimum wage by government fiat will almost always cause distortions, except in the rare and likely hypothetical instance when just by happenstance it coincides with the prevailing market wage.

Productivity of workers in competition with workers of other employers – not governments, not labor union bosses, and certainly not Sveriges Riksbank Prize-winners – will always better determine what a given job is worth, no more and no less. Pay too little and you’ll go out of business because no one will want to work for you. Pay too much and you’ll go out of business because customers will not want to pay the higher prices you’ll have to charge to make a profit and stay in business. Barriers to market entry, imperfect information, transaction costs, and labor mobility all factor into the equation, but at bottom it really is as simple as that.

Krugman goes on, as is his wont, to call “the evidence that minimum wages or social benefits are really a problem … ‘surprisingly fragile’,” and to suggest that Puerto Rico’s real problems are caused by the outmigration of younger, healthier workers leaving older, less healthy works behind to take advantage of the safety net of federal benefits. And he concludes incorrectly – as is also his wont – that “the saving grace in this situation is big government.”

But the fact that twice in one week The New York Times would print even a few sentences acknowledging that a higher minimum wage, I and of itself, is no social or economic panacea gives some small reason for hope.

[1] Actually, no such thing as the “Nobel Prize in Economics” exists. Alfred Nobel died in 1895, 73 years before Sweden’s central bank, the Sveriges Riksbank, made a donation to the Nobel Foundation on the bank’s 300th anniversary to establish the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.” The Royal Swedish Academy of Sciences, not the Nobel Committee, awards the prize, but Paul won it fair and square in 2008 and you can bet he’s not gonna give it up until they pry it from his cold, dead fingers.